Detailed Rationale

CRISIL Ratings has upgraded the long-term bank facilities of Minda Corporation Ltd (MCL; part of the MCL group) to 'CRISIL AA-/Stable' from 'CRISIL A+/Positive' and has reaffirmed the short-term rating at 'CRISIL A1+'.

 

The rating upgrade reflects continuous improvement in the MCL group's business risk profile driven by its strong market position in the auto component industry, group's diversified product offerings and its marquee customer base in domestic market. Minda Group is currently the second largest player in India in security systems for two-wheelers and a leading player in the wire-harnessing segment for two-wheeler, three-wheeler and commercial vehicles.  Group is expected to continue to improve its market position supported by continuous innovation being undertaken for various product segments and its long-standing relationships with marque customers viz. Bajaj Auto Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Mahindra and Mahindra Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Ashok Leyland Limited and TVS Motor Company Limited. Driven by healthy demand flow from domestic market and strong tie-up with customers, group has been growing at a rate much higher than industry growth rate (revenue growth was ~25-26% in FY22 vs 1-2% Industry growth in same fiscal). With continuous technological innovation and introduction of new products to its product profile, which is agnostic to the electric vehicle revolution, the group is expected to continue to diversify its offerings and grow at a double-digit growth rate annually over the medium term.

 

Revenue of group grew by ~27% in FY22 to Rs. 2976 cr. from Rs.2368 cr. in FY21 despite challenging macro-economic scenario & semiconductor chip shortage. The growth in revenue is driven by both volume and improved realizations. During H1FY23 company has already achieved the revenue of Rs.2,157 cr. (Rs.1289 cr. in H1FY22). With the continuous innovations and strong market position the revenue of the company is expected to improve more ta Rs. 4000 cr. in fiscal 2023. EBITDA margins of the group has improved from 8.96% in fiscal 2021 to 9.99% in fiscal 2022, the improvement is supported by favorable product mix and also tight control on fixed cost and neutralized lag between commodity and other cost initiatives. In H1FY22 company has achieved the margins of 11% and is expected to record EBITDA margins of more than 10% over medium term.

 

The rating upgrade also factors Minda group's strong financial risk profile supported by heathy net worth of more than Rs. 1163 cr. as on March 31, 2022. The net worth of the company is expected to improve further due to continuous accretion of reserves. The group has filled PLI application and the same has been approved under the component champion incentive scheme. The total investment under the scheme would be of Rs. 250 cr. Despite the continuous capex, the capital structure of the group is expected to remain comfortable with gearing below 0.50 times over medium term.

 

The ratings continue to reflect the group's established market position in India's automotive (auto) components industry, backed by a diversified product portfolio and healthy relationships with leading OEMs in two-, three-, and four-wheeler segments. The ratings also factor in its healthy financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices and to slowdown in the auto sector.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of MCL, its subsidiaries and step-down subsidiaries - including Almighty International PTE (Singapore), PT Minda Automotive (Indonesia), Minda Vietnam Automotive Company Ltd, Minda Instruments Ltd, Spark Minda Green Mobility System Private Limited and Joint venture Minda VAST Access System Pvt Ltd ('CRISIL A/Stable'), Minda Infac Private Limited. All the entities, collectively referred to as the MCL group, have significant business and financial linkages and are controlled by MCL.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established market position in the auto component sector: The promoters have an experience of over 6 decades in the automotive component industry. During these years, group has continuously improved on its business profile by being close to its customers, majorly original equipment manufacturers (OEMs). Group has 32 facilities across the globe with majority of them located in India. It is because of this strong presence that group has been able to establish itself in the market over the years. Group is currently the second largest player in India in security systems for two-wheelers and leading player in the wire-harnessing segment for two-wheeler, three-wheeler and commercial vehicles. Group is expected to continue to improve its position supported by continuous innovation being undertaken for various product segments. It is because of this established market position that group has been growing at a rate much higher than industry growth rate. Industry has grown at rate of 1.2% however Minda group has grown at ~25-26% in FY22.

 

Diversified product and customer profile: Group has a well-diversified product profile and has healthy relationships with customers. The products cater to the two-wheeler, three-wheeler, commercial vehicle, four-wheeler, and replacement market segments, resulting in a diversified customer base. There is no single OEM who contribute more than 15% of the group's revenue. Moreover, past association with global OEMs through overseas entities has resulted in revenue generation for certain components in the domestic market. Strong performance for different divisions with strong order book of more than Rs. 5900 crore as on March 31, 2022 date providing healthy revenue visibility.

 

Strong financial risk profile: Group has strong net worth of 1163 cr. as on March 31, 2022. The net worth of the company is expected to improve further due to continuous accretion of reserves. Company has strong financial risk profile with low gearing of below 0.5 times in last 3 fiscals ending FY22 and with strong net worth and liquidity the financial risk profile of the company is expected to remain strong over the medium term. Minda group has a strong debt protection matrix with interest coverage of more than 9 times and NCAD of 0.74 times as on FY22 and is expected to be in the range over the medium term.

 

Weakness:

Susceptibility to slowdown in the auto industry: Growth in business is contingent on sustained ramp-up in the auto segment. In the domestic market, the biggest customers are Bajaj Auto Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Mahindra and Mahindra Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Ashok Leyland Limited and TVS Motor Company Limited; the bulk of overall revenue is derived from these clients. The auto industry in India, particularly the passenger car and commercial vehicle segments, is cyclical and has witnessed a slowdown in some years. However, diversified segmental presence protects the MCL group from a significant decline in any one segment.

 

Vulnerability to volatility in raw material prices: 

The margin remains susceptible to volatility in raw material prices. Majority of groups raw materials consists of base metals i.e. copper, aluminium, zinc, and group also imports about sizeable portion of its raw materials, which exposes it to fluctuations in forex rates. Also, frequent changes in input prices make it difficult for auto component manufacturers to pass on any rise in cost immediately to OEMs.  etc.

Liquidity: Superior

Group had a raised Rs. 320 cr. through a qualified institutional placement (QIP) in 2018 and Rs 80 crore raised by selling 4.96% stake in MCL to Phi Capital. Group is expected to continue to maintain a healthy cash balance in the range of Rs 300-400 crore even in case of any acquisition in the near to medium term.

 

Group is expected to generate healthy annual accruals in the range of Rs 300 crore to Rs 350 crore over the next 2 fiscals against annual repayments of Rs.50-60 crore. Bank limits were utilized at an average of 61% for the last 16 months ending July 2022. Company is maintaining healthy cash and bank balance of over Rs. 335 crores as on March 31, 2022 (~Rs.331 Crore as on Sep 2022).

Outlook: Stable

CRISIL Ratings believes the MCL group's business risk profile is expected to continue to improve over the medium term driven by its established position in the auto components industry and healthy relationships with OEMs.

Rating Sensitivity Factors

Upward Factors

• Steady revenue growth on y-o-y basis driven by increased market share, and improved operating profitability by 300 basis points on a sustainable basis, leading to healthy cash generation.
• Prudent working capital management and sustained strong financial risk profile with gearing below 0.20 times over medium term.

 

Downward Factors

• Substantial decline in scale of operations or decline in operating probability below 9% leading to lower than anticipated cash accrual generation.
• Large debt-funded capital expenditure, or acquisition or substantial increase in working capital cycle weakening the financial risk profile, especially liquidity.

About the Company

MCL, based in Noida, was incorporated as Minda Switch Auto Ltd in 1985 and got its current name later. It is the flagship company of the Spark Minda group.

 

The MCL group manufactures auto components for major OEMs in the two-wheeler, passenger vehicle, and commercial vehicle segments in the domestic and international markets. The group also supplies to the replacement market. Key products include locksets, door handles, wiring harnesses, instrumentation clusters, plastic interior systems and sensors in the domestic market and international market.

  

MCL is listed on the National Stock Exchange and Bombay Stock Exchange.

Key Financial Indicators - Consolidated*

As on/for the period ended March 31	Unit	2022	2021
Operating income	Rs crore	2976.80	2368
Reported profit after tax (PAT)	Rs crore	192.90	52.6
PAT margin	%	6.48%	2.2
Adjusted debt/adjusted networth	Times	0.34	0.4
Interest coverage	Times	9.29	5.4

*CRISIL Ratings adjusted figures.

Any other information: Not applicable